Question

4. Scott, Inc. plans to manufacture scooters for commuters. The company expects to have two models, the “C” and the “R” models. The company will use activity-based costing to apply its estimated $145,000 of overhead costs to its products. Information about its overhead follows:

Activity (Cost Driver)		Estimated MOH	Expected Activity
			Total	C Model	R Model
Assembly (Labor Hours)		$20,000	10,000	6,000	4,000
Quality control (Inspection Hours)		35,000	2,000	600	1,400
Parts Admin (Number of Parts)		90,000	100	40	60
		$145,000

The following cost data is known:

	C Model	R Model
Direct Materials	$600	$900
Direct Labour	250	400
Number of units produced	250 units	150 units

The company has not yet determined its planned selling price, but knows that the average price for competitors of the C Model is $1,200. For the R Model, competitors are priced at $1,700 on average.

Required:

1. Compute the activity rates for each activity.
2. Determine the expected unit cost of each product.
3. If Scott, Inc. prices its products in line with competitors, what will the margins be on each product? The largest competitors have gross profit margins of 23%, how does Scott, Inc. compare?

Please review the hint for this problem –down below:

a) Activity Rates

	Total Cost Estimate ($)	Estimated Number of Units of Activity	Cost per Unit of Activity/Driver ($)	Costs allocated to C Model ($)	Costs Allocated to R Model ($)
Assembly (DL hrs)
Quality Control (Insp. hrs)
Parts Admin (# of parts)
Total MOH Cost
Number of units
MOH per unit (Est.)

b) Per Unit Total Cost

	C Model	R Model
Direct materials
Direct labor
Est. MOH (see part a)
Total cost per unit

c)

	C Model	R Model
Price ($)
Cost (See part b)
Gross profit ($)
Margin (%)

Answer 1

	Total Cost Estimate ($)	Estimated Number of Units of Activity	Cost per Unit of Activity/Driver ($)	Costs allocated to C Model ($)	Costs Allocated to R Model ($)
Assembly (DL hrs)	20000	10000	2	12000	8000
Quality Control (Insp. hrs)	35000	2000	17.5	10500	24500
Parts Admin (# of parts)	90000	100	900	36000	54000
Total MOH Cost	145000			58500	86500
Number of units				250	150
MOH per unit (Est.)				234.00	576.67
b) Per Unit Total Cost
	C Model	R Model
Direct materials	600	900
Direct labor	250	400
Est. MOH (see part a)	234.00	576.67
Total cost per unit	1084	1,876.67
c)
	C Model	R Model
Price ($)	1200	1700
Cost (See part b)	1084	1,876.67
Gross profit ($)=Sales-Cost	116	-176.67
Margin (%) =Gross Profit / Sales	9.67%	-10.39%